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Friday, December 28, 2012

Averting the "Fiscal Cliff": A Solution Overlooked

With just days to avert the beginning of automatic, across-the-board cuts in the U.S. federal budget and the end of the Bush tax cuts and payroll tax reductions, President Obama met with Congressional leaders at the White House following a brief respite over Christmas. The discussion was doubtless on what could pass Congress in time. The U.S. Secretary of the Treasury was also attending, so the upcoming debt-limit could also have been part of the discussion. It could be argued that the perspective itself at the meeting must have been too narrow—too small—even though the crisis demanded leadership.

Speaking after meeting with Congressional leaders, President Obama could have used the crisis to propose a seismic shift in American federalism in line with reducing the federal debt. Getty Images

On the floor of the U.S. Senate the day before, Harry Reid of Nevada, the majority leader, criticized Republicans for failing to act. “We are here in Washington working while the members of the House of Representatives are out watching movies and watching their kids play soccer and basketball and doing all kinds of things. They should be here. I can’t imagine their consciences.” A day earlier, the Speaker of the U.S. House of Representatives, John Boehner, had urged the Democratic-controlled Senate to act first. With this kind of bickering, the failure of Congressional leaders and the president to reach a deal is all easy to understand.

However, beyond the immaturity, we should also bear in mind that the delegates at the U.S. constitutional convention in 1787 designed the federal government so as to impede agreement. Most of government was understood to be rightly conducted in the member states, rather than at the federal level. Specifically, the separation of powers between the executive and legislative branches, and the bicameral legislature, provide ample opportunity for one political party to obstruct the proposals of another. Given this design, the underlying problem behind the fiscal mismanagement at the federal level can be said to be the increase in power, or competencies (in European terms), of the federal government. If legislating is difficult by design at the federal level, then adding powers to the federal government exacerbates the weakness. Put another way, the federal government was not designed to carry so much of the weight.So the problem is not just simply the particular office-holders at the federal level.

Accordingly, President Obama missed a great opportunity at the meeting at the White House with Congressional leaders. Rather than being oriented to what minimal legislation could pass both chambers to avert the tax increases and budget cuts that would significantly reduce the federal deficit in 2013, the president could have presided over the system as a whole. Specifically, he could have proposed that much of the domestic functions of the federal government be transferred entirely to the states. The federal budget could be slashed, and taxes held firm so any resulting surpluses could be used to reduce the federal debt.

To be sure, the media would doubtless claim that the federal leaders had admitted failure in handing power back to the states. Obama could have made the point, however, that he and the others were working against a federal design designed for them to meet obstruction after obstruction—swimming up-stream, in effect. “We are not super humans,” he could have pleaded.

A more serious criticism would be that whether or not a given state takes over a certain federal domestic program would be up to the state government. Some programs, such as social security, foodstamps, Medicare and Medicaid, may be too important to be applied only in some states. The shift here could be in terms of the federal contribution. The real obstacle is the fallacious assumption that in a federal system each state must be on the same level economically and in terms of what residents get from government. This assumption violates the dual-sovereignty attribute of modern federalism. In other words, the assumption treats a federal system as if it were merely a state.

Another objection would be that state taxes would be likely to rise while federal taxes stay constant to generate the surpluses to pay down the federal debt. However, this is merely to say we should no longer live beyond our means. That some states would have more government than others means that state taxes would increase to various extents, depending on the state. As of the end of 2012, California had a 10% income tax while Florida, Texas and Alaska had none. It could be argued that given state differences, the tax difference should be even more—with Oklahoma relying on private health insurance, for example, while Massachusetts goes on with universal health-care subsidized by the government. The addition of other domestic policy areas to state government would likely increase the difference in terms of government between states like Oklahoma and Massachusetts.

The resulting increase in political diversity in the U.S. would more closely fit the different political/ideological cultures—Oklahoma’s being quite distinct from Oregon’s and New York’s being distinct from Nevada’s.The one-size-fits-all assumption underlying so much of the federal encroachment does not fit with the scale of the United States—a virtual empire. In fact, the fiscal imbalance at the federal level can be viewed as a manifestation of the political imbalance between the federal and state governments. The federal system is out of balance. In addressing this problem rather than merely symptoms such as the "fiscal cliff," the debt-ceiling, and the huge deficits themselves, PresidentObama could have transcended the fixation on averting the fiscal cliff by enacting transformational leadership in order to restore balance to American federalism. While not a perfect or flawless solution, realigning the federal balance of power could have set the United States on a more viable trajectory forward in the long term, as evinced in reductions in the federal deficits and accumulated debt. If we do not trust the states to pick up the slack (as envisioned by the American founders), then we do not trust ourselves, in which case not even a federal government can save us from ourselves.